What is a Merchant Cash Advance, and Is It Right For Your Business?

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If your business needs a quick and easy cash infusion, you may consider a merchant cash advance (MCA). MCAs are an attractive financing option for small businesses because they are fast and relatively easy to obtain. But before you jump on the MCA bandwagon, it’s essential to understand how they work and whether they are the right choice for your business.

What is a merchant cash advance?

A merchant cash advance is short-term financing in which a business gets a total sum of cash in exchange for a portion of its future sales. You repay the advance through a percentage of the business’s daily credit card sales, with repayments typically lasting between six and 18 months.

 

MCAs are typically used by businesses that need quick cash and may not be able to qualify for a traditional bank loan.

How does a merchant cash advance work?

The way a merchant cash advance works are relatively simple. The lender agrees to give the borrower a certain amount of cash, which the borrower then repays with a percentage of their future credit card sales. It’s important to note that MCAs are different than same-day loans.

The daily repayment amount is automatically deducted from the borrower’s credit card sales, making it a convenient way to repay the advance. However, it’s important to note that the repayment amount can fluctuate based on the total number of daily credit card sales the business makes. 

Another thing to remember is that merchant cash advances typically have higher interest rates than other types of financing, such as bank loans, because they are higher-risk loans. The lender is taking on a greater risk by lending to a business that may not be able to repay the loan, so they charge a higher interest rate to offset that risk.

Is a merchant cash advance right for your business?

Now that you know how merchant cash advances work, you may wonder if they are the right choice for your business. The answer is that it is conditional, dependent on your specific situation. Here are a few options to consider when making your decision:

Do you need quick cash? Merchant cash advances are one of the easiest and fastest ways to get funding for your business. An MCA may be a good option if you need money quickly to cover an unexpected expense or take advantage of a business opportunity like IT equipment.

Do you have bad credit? Because merchant cash advances are considered high-risk loans, they may be easier to obtain than other types of financing if you have bad credit. An MCA may be viable if your business struggles to get approved for a bank loan.

Conclusion

Merchant cash advances can be a useful financing option for small businesses, but it’s essential to understand how they work and whether they are the right choice for your business. Consider the factors we’ve discussed and speak with a financial advisor to learn more about MCAs and other financing options before making a decision.

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